Tuesday, April 28, 2009

Second-Mortgage Holders Are Target of Obama Administration Plan

The Obama administration will offer a new program today to help borrowers with second mortgages stay out of foreclosure, along with revisions to other government loan-modification programs, administration officials said.

The goal is to make it easier for homeowners to seek help with second liens such as home-equity loans, said the officials, who declined to be identified before the announcement. The new program will provide cash to mortgage servicers, investors and borrowers who modify the terms of a loan and show success with the new payment schedule.

The administration has offered a series of initiatives in efforts to stem the collapse in home values and the rise in foreclosures. Mortgage delinquencies increased to a seasonally adjusted 7.88 percent of all loans in the fourth quarter, the highest in records going back to 1972, the Mortgage Bankers Association in Washington said March 2. Loans in foreclosure rose to 3.3 percent, up from 2.04 percent a year earlier.

The proposals to be announced today by the Treasury and the Housing and Urban Development Department will have eligibility standards similar to the Obama administration’s existing mortgage-modification program.

Fannie Mae and Freddie Mac, the government-backed mortgage finance companies, will administer the new initiative. Funds will come from $75 billion already set aside by the administration for housing. That includes $50 billion from Treasury’s Troubled Asset Relief Program, supplemented by $25 billion from Fannie Mae and Freddie Mac.

Second Liens Adjusted

Under the new plan, second liens will be adjusted automatically when a homeowner’s primary mortgage is altered through the federal program, the administration officials said in a telephone interview. The program also will include procedures under which second loans can be modified independently.

The program should be up and running in about a month, the officials said. They estimated that about 75 percent of all U.S. mortgages are managed by servicers that already have agreed to participate in the government’s modification programs. Servicers manage the relationship between lenders and borrowers.

Obama’s overall plan to reduce foreclosures by modifying mortgages targets as many as 4 million homeowners. As many as half of the participants in the mortgage-modification program may be eligible for the second-lien assistance, the administration officials said.

The mortgage initiative offers subsidies to servicers and lenders, including bond investors, to help lower borrowers’ housing payments to 31 percent of their income.

$2,500 to Servicers

The administration’s latest plan also aims to beef up the government’s Hope for Homeowners mortgage-aid program. That initiative, enacted during the previous administration, so far has helped only a handful of borrowers refinance their mortgages into government-backed Federal Housing Administration loans.

To improve results of Hope for Homeowners, the Obama administration plans to add an upfront incentive payment of $2,500 to loan servicers, the officials said.

The administration also intends to urge Congress to pass other changes to Hope for Homeowners to make it easier to use and more accessible, the administration officials said. The program is primarily aimed at borrowers who are “underwater,” owing more on their mortgages than their home is worth.

No other legislative changes are required for the administration’s revised housing plans to take effect, the officials said.

Bankruptcy Judges

The administration separately backs giving bankruptcy judges the ability to change mortgage terms, as provided under legislation passed by the House and now awaiting action in the Senate. The administration hasn’t taken a stand on so-called safe harbor provisions that would shield mortgage servicers from bondholder lawsuits.

The servicer protection is needed if the U.S. wants as many homeowners helped under Obama’s loan-modification plan as intended, a Bank of America Corp. executive said.

“If the government wants to go down a path of being all- inclusive of who would be eligible, then I think that’s required,” Barbara Desoer, head of mortgage, home equity and insurance at the Charlotte, North Carolina-based bank, said in an April 23 interview.